Bcon 141 – Introduction to

Business Economics
Module 3: Business Optimization using
Linear Programming

Ian Dave B. Custodio

Instructor
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Lesson 6: Linear Programming

Learning objectives:
- Define Linear Programming
- Differentiate the different assumptions of Linear Programming
- Solve Linear Programming Problems
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Outline
6.1 Linear Programming: Definition and Properties
6.2 LP Model Components
6.3 Steps of Model Formulation
6.4 Finding Solution
6.4.1 Graphical Solution
6.4.2 Mathematical Solution
6.4.3 Computer Solution using Excel Add-ins: Solver and OM/QM
6.5 Special Cases of LPP
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6.1 Linear Programming:

Definition and Properties
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Linear Programming
- a tool in Mathematics for solving optimization problems.
optimization (mathematical optimization): is one in which some function (objective) is
either maximized or minimized relative to a given set of constraints.

- in business and economics, it is a model that consists of linear relationships

representing a firm’s decision(s), given an objective and resource constraints.
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Properties (or assumptions):

1. Proportionality
2. Additivity
3. Divisibility
4. Certainty
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1. Proportionality
- implies that the marginal rate of contribution to the objective for each variable is
assumed to remain constant throughout the entire range of activity levels in the
problem.
This means, if the product contributes P20 towards the profit, then the total
contribution would be equal to 20x1, where x1 is the number of units of the product.
For example:
5 units of the product = P100
10 units of the product = P200
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2. Additivity
- implies that the contribution of the variables to the objective is assumed to be the
sum of their individual weighted contributions.

The total value of the objective function is equal to the sum of the
contributions of each variable to the objective function.

TPr = 𝑃1 𝑋1 + 𝑃2 𝑋2+ 𝑃3 𝑋3
where: TPr = Total Profit, P are profit for each product X
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3. Divisibility
- means that the variables can take on any non-negative value including fractional
values (the variables are said to be continuous or divisible, as opposed to integer or
discrete values).

For example:
10 1/4 maple tables
5.5 cherry tables
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4. Certainty
- means that the problem is assumed to have no probabilistic elements (such as
changes on input prices for labor, raw materials, etc.).

For example,
The net profit per cherry table is 2,000, but this value depends upon the tables’
cost, the cost of materials, and the sale price wherein all of which could be random
variables.
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6.2 LP Model Components

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LP Model components
1. Decision variables
2. Objective function
3. Constraints
4. Parameters
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1. Decision variables (unknowns)

- mathematical symbols (e.g. characters, letters) representing the decisions to be
made.

Examples: 𝑋1 = number of cherry tables to be made

𝑋2 = number of pine tables to be made
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2. Objective function
- a linear mathematical relationship describing an objective of the firm, in terms of
decision variables - this function is to be maximized or minimized.

Examples: Maximize Profit

Minimize Costs
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3. Constraints
– requirements or restrictions placed on the firm by the operating environment, stated
in linear relationships of the decision variables.

Examples: 𝑋1 + 𝑋2 >= 1,000 hectares

𝑋1 <= 500 hectares
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4. Parameters
- numerical coefficients and constants used in the objective function and constraints.

Examples: Pr = 10𝑋1 + 5𝑋2

𝑋1 + 𝑋2 >= 1,000
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6.3 Steps of Model

Formulation
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Steps of Model Formulation

Step 1 : Define the decision variables
(What do you want to know or to determine?)

Step 2 : Define the objective function

(Maximize? or Minimize?)

Step 3 : Define the constraints

(What are the limitations on resources?)
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Example Problem:
Philippine Pottery Company is a small crafts operation run by a Native Filipino Tribal
Council. The company employs skilled artisans to produce clay bowls and mugs with
authentic native Filipino designs and colors. The two primary resources used by the
company are special pottery clay and skilled labor. The bowl needs 1hr of labor and needs
4kls of clay while the mug needs 2hrs of labor and 3kls of clay. Bowl yields a profit of P40
while mug yields P50. There are 40 hours of labor and 120 kls of clay available each day
for production.
Given those limited resources, the company desires to know how many bowls and mugs
to produce each day in order to maximize profit.
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Resource Requirements

Labor Clay Profit

Product
(Hr/Unit) (Kls/Unit) (P/Unit)

Bowl 1 4 40

Mug 2 3 50

Figure 1 The Philippine Pottery Company

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Step 1 : Define the decision variables

What is/are the decision variables of the problem?
Step 2 : Define the objective function
What is the objective function?
Step 3 : Define the constraints
What is/are the constraints?
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Resource Availability: 40 hrs of labor per day

120 kls of clay
Decision Variables: x1 = number of bowls to produce per day
x2 = number of mugs to produce per day
Objective Function: Maximize Z = P40x1 + P50x2
Where Z = profit per day
Resource Constraints: 1x1 + 2x2 ≤ 40 hours of labor
4x1 + 3x2 ≤ 120 pounds of clay
Non-Negativity Constraints: x ≥ 10; x2 ≥ 0
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Complete Linear Programming Model of the problem:

Maximize Z = P40x1 + P50x2

subject to: 1x1 + 2x2 ≤ 40

4x1 + 3x2 ≤ 120
x ≥ 10; x2 ≥ 0
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6.4 Finding Solution

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1. Graphical Solution
2. Mathematical Approaches:
1.1 Substitution
- Substitute one variable in terms of the other equation.
1.2 Elimination (via Addition or Subtraction)
- Eliminate one of the variables by adding/subtracting the equations
then find the value of the remaining variable.
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3. Computer Solutions (using MS Excel/ Excel Add-in):

2.1 Graphical
2.2 Solver
2.2 OM/QM
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6.4.1 Graphical Solution

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Graphical Solution
- one of the most used solution for solving Linear Programming problems which only
involves two decision variables.

- it solves the problem by plotting the functions and constraints in a graph and
determine the most feasible solution.

- “geometric approach”
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Feasible vs. Infeasible Solution

Feasible Solution
- Solution does not violate any of the constraints

Infeasible Solution
- Solution violates at least one of the constraints
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Complete Linear Programming Model of the previous problem:

Maximize Z = P40x1 + P50x2

subject to: 1x1 + 2x2 ≤ 40

4x1 + 3x2 ≤ 120
x ≥ 10; x2 ≥ 0
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Feasible Solution
Example: x1 = 5 bowls
x2 = 10 mugs
Z = P40x1 + P50x2 = P700

Labor constraint check: 1x1 + 2x2  40

1(5) + 2(10) = 25 ≤ 40 hours

Clay constraint check: 4x1 + 3x2  120

4(5) + 3(10) = 50 ≤ 120 kls
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Infeasible Solution
Example: x1 = 10 bowls
x2 = 20 mugs
Z = P40x1 + P50x2 = P1400

Labor constraint check: 1x1 + 2x2  40

1(10) + 2(20) = 50 > 40 hours
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X2 are mugs

Maximize Z = P40x1 + P50x2

subject to: 1x1 + 2x2  40
4x1 + 3x2  120
x1, x2  0

X1 are bowls
Figure 2 Coordinates for Graphical Analysis
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Maximize Z = P40x1 + P50x2

subject to: 1x1 + 2x2  40
4x1 + 3x2  120
x1, x2  0

Figure 3 Graph of the labor constraint

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Maximize Z = P40x1 + P50x2

subject to: 1x1 + 2x2  40
4x1 + 3x2  120
x1, x2  0

Figure 4 Labor constraint area

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Maximize Z = P40x1 + P50x2

subject to: 1x1 + 2x2  40
4x1 + 3x2  120
x1, x2  0

Figure 5 The constraint area for clay

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Maximize Z = P40x1 + P50x2

subject to: 1x1 + 2x2  40
4x1 + 3x2  120
x1, x2  0

Figure 6 Graph of both constraints

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Maximize Z = P40x1 + P50x2

subject to: 1x1 + 2x2  40
4x1 + 3x2  120
x1, x2  0

Feasible region
-the set of all points that
satisfy all the constraints of
the model(s).
Figure 7 The feasible solution area on the
constraints
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Finding the optimal solution:

Isoprofit Approach
-“iso” means equal/same
-the profit anywhere on the
line is the same.

Maximize Z = P40x1 + P50x2

subject to: 1x1 + 2x2  40
4x1 + 3x2  120
x1, x2  0

Figure 8 Objective function line for Z = $800

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Finding the optimal solution:

Isoprofit Approach
-“iso” means equal/same
-the profit anywhere on the
line is the same.

Maximize Z = P40x1 + P50x2

subject to: 1x1 + 2x2  40
4x1 + 3x2  120
x1, x2  0

Figure 9 Alternative objective function lines

for profits, Z, of P800, P1,200, and P1,600
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Maximize Z = P40x1 + P50x2

subject to: 1x1 + 2x2  40
4x1 + 3x2  120
x1, x2  0

Figure 10 Identification of the optimal solution

point
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Maximize Z = P40x1 + P50x2

subject to: 1x1 + 2x2  40
4x1 + 3x2  120
x1, x2  0

Point B coordinates:
x1 = 24
x2 = 8

Figure 11 Optimal solution coordinates

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Finding the optimal solution:

Corner Point Solution
-the optimal solution to a
LPP, if it exists, occurs at the
corners (vertex) of the
feasible region.

Maximize Z = P40x1 + P50x2

subject to: 1x1 + 2x2  40
4x1 + 3x2  120
x1, x2  0
Figure 12 Solutions at each corner points
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6.4.2 Mathematical Solution

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Mathematical Solutions
Substitution
- Substitute one variable in terms of the other equation.

Elimination (via Addition or Subtraction)

- Eliminate one of the variables by adding/subtracting the equations
then find the value of the remaining variable.
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6.4.3 Computer Solution using Excel

Add-ins: Solver and OM/QM
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2.1 Graphical Solution (using Excel 2013)

Plug in the data (derived coordinates)
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1. Highlight the

2.1 Graphical Solution (using Excel 2013)

coordinates of the
first constraint.

2 4 2. Go to “Insert” Tab
5
3 3. Select
“Recommended
Charts”

4. Select “All Charts”

and click “X Y
Scatter”

1 5. Select “Scatter
with Straight Lines”

6. Select the second

image showing a
single a straight line
and click “OK”
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2.1 Graphical Solution (using Excel 2013)

Right click on the Letter “B” at the top of the graph and click “Delete”.
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2.1 Graphical Solution (using Excel 2013)

1. Click anywhere on
the graph.

2. Select the funnel

like icon.

3. Click on the
“Select Data…”
menu on the bottom
1 2 part of the window
that popped up.

3
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2.1 Graphical Solution (using Excel 2013)

1. Select “B” and

click “Edit”

1
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2.1 Graphical Solution (using Excel 2013)

1. Delete all the
contents on the
“Series Name”

2. Click the encircled

icon.

1 2
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2.1 Graphical Solution (using Excel 2013)

1. Then click on the
cell that contains the
word “Labor
Constraint”

2. Click back the

encircled icon.
1 2

3. Empty the “Series

3 X values:”
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2.1 Graphical Solution (using Excel 2013)

1. Click the encircled
icon.

2. Our X-axis values

are the x1 values for
both points, so
highlight the x1
values on Point A
2 and B. (0, 40)

3. Click back on the

1 encircled icon.
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2.1 Graphical Solution (using Excel 2013)

1. Empty the “Series
Y values:” then click
the encircled icon.

2. Our Y-axis values

are the x2 values for
both points, so
highlight the x2
values on Point A
and B. (20, 0)
2
1 3. Click back on the
encircled icon and
click OK on the
bottom part of the
window.
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2.1 Graphical Solution (using Excel 2013)

1. So we’re done
with the first
constraint and now
we will incorporate
the second
constraint (Point C
and Point D) on the
graph. Start by
clicking “Add”
1
2. Just follow the
same steps (from
the previous four
slides) on
constructing the
graph of the first
constraint.
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2.1 Graphical Solution (using Excel 2013)

Once done, you should have the same graph as shown below. Just click “OK” to finish
setting up the graph of both constraints.
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2.1 Graphical Solution (using Excel 2013)

We need to reduce the intervals of the data points in each axis in order to determine the
coordinates of the optimal point (point of intersection).
1. Start on the x-
axis. Right Click on
any of the values (0
– 45) on the x-axis
and select “Format
Axis” on the menu.

1
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2.1 Graphical Solution (using Excel 2013)

1. Change the
value of the “Major”
submenu under the
“Units” menu from
“5.0” to “1.0” and
press enter on the
keyboard in order
to have a detailed
scaling on the x-
axis.

2. Repeat the same

1 step for the y-axis.
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2.1 Graphical Solution (using Excel 2013)

Enlarge the graph and we can now determine the coordinates of the optimal point (24,8).

x1 (x-axis): 24
x2 (y-axis): 8
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2.2 Solver Add-in (using Excel 2013)

Load first the Solver Add-in by following the instructions (for Windows OS) below from the
official Microsoft Support (http://bit.ly/installsolver)
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2.2 Solver Add-in (using Excel 2013)

Plug in the data (based on the given of the problem) with the following format.

Non-negativity Constraint
Objective Function

Constraints

Results area. Cells highlighted

in yellow will reveal the
solution.
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2.2 Solver Add-in (using Excel 2013)

Highlight the
resulting cells of
the objective and
the constraints
(B11, B12, B13)
and insert the
formula shown in
the picture. After
the MMULT,
highlight the given
of the objective and
the constraint
(B2:C7) and after
the TRANPOSE
highlight the
resulting values of
x1 and x2
(B15:C15).
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2.2 Solver Add-in (using Excel 2013)

Once done typing the formula, press “Ctrl + Shift + Enter” on the keyboard to have the
following output.
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2.2 Solver Add-in (using Excel 2013)

Go to “Data” tab and on the rightmost menu, click on “Solver” and the Solver window will
pop-up.
1
2
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2.2 Solver Add-in (using Excel 2013)

If all are set, then

you can now solve
the problem by
clicking the “Solve”
Choose according to the objective button at the
Title of the problem bottom of the
Solver widow.

Make sure to tick the checkbox

Choose “Simplex LP”

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2.2 Solver Add-in (using Excel 2013)

Click “OK” on the window that will pop-up and you now have the answer.

Max Profit =
1,360
Optimal Combination: x1=24, x2=8
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2.3 OM/QM Add-in (using Excel 2013)

Install first the OM/QM (Weiss or Taylor’s version) add-in by downloading from this link:

bit.ly/EXCELOMQM-WEISSv4

Once finished downloading, double click the file and follow the installation process.
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2.3 OM/QM Add-in (using Excel 2013)

1. After double clicking the file, a window will pop-up, Just click “Next”
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2.3 OM/QM Add-in (using Excel 2013)

2. Click “Next”
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2.3 OM/QM Add-in (using Excel 2013)

3. Choose 32 bit, if there’s an error that will pop-up saying that it is not compatible, then
choose 64 bit and then click “Next”
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2.3 OM/QM Add-in (using Excel 2013)

4. Click “Next”
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2.3 OM/QM Add-in (using Excel 2013)

5. And lastly, click “Next”. After clicking the Next button, the installation window will
disappear and Excel OM/QM is already installed. You can now enable the add-in by
following the same steps of the Solver Add-in.
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2.3 OM/QM Add-in (using Excel 2013)

Open a new excel workbook, go to File > Options > Add-ins > Select “Excel Add-ins” on
the Manage Menu and click “Go…”. This window will pop-up. Make sure to check both
Excel OM/QM and Solver Add-in and click “OK”.
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2.3 OM/QM Add-in (using Excel 2013)

Once already enabled, a new tab named “Excel QM” will appear.
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2.3 OM/QM Add-in (using Excel 2013)

To use the add-in, go to Excel QM tab and click “By Chapter”, then click “Chapters 2,3,4;
Linear Programming” menu.
1
2
3
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2.3 OM/QM Add-in (using Excel 2013)

A window will pop-up. Fill in the needed information and once done, click “OK”.

Title of the problem

Enter the number of constraints

(in our example, we have two
constraints, labor and clay)
Enter the number of decision
Choose according to
the objective of the variables (in our example, we
problem have two decision variables, x1
and x2)
Those are just the important parameters/menus needed to be adjusted
according to the problem. Just leave the other menus “as is”.
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2.3 OM/QM Add-in (using Excel 2013)

Input the given of the problem on the orange highlighted areas. Leave the other items “as
is”.

Constraint 1 is the Labor Constraint Total Available

Resources
Constraint 2 is the Clay Constraint
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2.3 OM/QM Add-in (using Excel 2013)

In order to solve the problem, OM/QM also utilizes the Solver Add-in. To solve, go to
“Data” tab, click “Solver” and directly click the “Solve” button.

1 2

3
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2.3 OM/QM Add-in (using Excel 2013)

Another solver window again will pop-up, just click “OK” and you now have the answer.

Optimal Combination: x1=24, x2=8

Profit = 1, 360
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6.5 Special Cases of Linear

Programming Problems
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Special types of problems include those with:

1. Multiple optimal solutions
2. Infeasible solutions
3. Unbounded solutions
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1. Multiple optimal solutions

The objective function is
parallel to a constraint line.
Maximize Z=40x1 + 30x2
subject to: 1x1 + 2x2  40
4x2 + 3x2  120
x1, x2  0
Where:
x1 = number of bowls
x2 = number of mugs

Graph of an example with multiple optimal solutions

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2. Infeasible solutions
Every possible solution
violates at least one constraint:

Maximize Z = 5x1 + 3x2

subject to: 4x1 + 2x2  8
x1  4
x2  6
x1, x2  0

Graph of an infeasible problem

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3. Unbounded solutions
Value of the objective
function increases indefinitely:

Maximize Z = 4x1 + 2x2

subject to: x1  4
x2  2
x1, x2  0

Graph of an unbounded problem

THANK YOU!